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British currency holds its ground against non-dollar peers.

The pound enters Wednesday on the defensive as energy-driven inflation fears and shifting interest-rate expectations pull currency markets in competing directions.

Sterling is softer against most peers in early trade even as the factors that lifted it earlier this week remain in play, highlighting the currency's overall resilience in an unsettled market backdrop.

Oil and gas prices are climbing again, fuelling concerns that inflation pressures could re-emerge just as central banks thought they were gaining control.

Brent crude has risen to $82.83 per barrel while UK wholesale gas opened at £142.89 per therm, its highest level since October 2022.

📈 This has boosted the dollar - the ultimate petro-currency - across the board and weighed on the currencies of fuel-importing nations.

👀 But, surprisingly, the pound is holding its ground elsewhere because the energy price surge is raising expectations that inflation could stay higher for longer across the globe, which means the Bank of England won't be able to lower rates again anytime soon.

It simply means pound sterling will be able to hold onto its interest rate advantage for longer.

These dynamics were evident on Tuesday when sterling advanced against the euro and several other peers after UK government bond yields jumped.

The two-year gilt yield, which closely tracks expectations for central bank policy, surged to 3.74% after rising sharply over the previous two sessions. GBP/EUR tracked the move to go back above 1.15.

📈 Those gains reflect a rapid shift in market thinking:

Late last week, traders saw roughly an 80% chance the Bank of England would cut interest rates by 25 basis points at the March 19 meeting.

By the close of trading Tuesday, that probability had fallen to below 25%.

When investors scale back expectations for rate cuts, short-term government bond yields tend to rise because markets assume interest rates will remain higher for longer.

Higher yields increase the return available on sterling-denominated assets, which in turn tends to support the currency.

That relationship has been visible in the recent performance of the pound-euro exchange rate. Kathleen Brooks, analyst at XTB says the pound "is one of the more resilient currencies... as higher yields and a reduction in BOE rate cut expectations for this year bolster the pound."

GBP/EUR climbed from Monday’s low to reach 1.1502 on Tuesday, mirroring the sharp rebound in the UK two-year yield.

The renewed link between bond markets and currencies marks a shift in the market narrative: for much of late 2025 sterling’s moves were dominated by political and fiscal developments following the autumn budget.

But since early January, interest-rate differentials appear to have reclaimed their traditional role as the dominant driver (see chart above).

With investors previously expecting deeper rate cuts from the Bank of England than from the European Central Bank, the pound weakened through much of early 2026.

Now that assumption is being challenged.

Energy-driven inflation fears are forcing markets to reconsider how far the Bank of England can ease policy, pushing yields higher and giving the pound intermittent support.

The result is a choppy and volatile trading environment that requires those with payment needs to be more watchful of market developments and reactive to beneficial movements.